What is Product-Market Fit?

You’ve got the perfect business idea and you want to roll with it.

But how do you know if there’s enough market demand to make it worthwhile?

That’s what product-market fit tries to answer, and it’s essential if you want your business to outshine your competitors.

Definition of product-market fit

Product-market fit (PMF) is the stage of a business’ lifecycle when a product meets the needs of a target market.

In simpler words, PMF happens when a business sees a need and builds an innovative solution that people want to buy. This triggers rapid growth and improved customer retention.

Why is product-market fit important?

Product-market fit is sometimes described as the moment when your product “clicks” with your target audience, leading to customers quickly adopting the product.

There are several reasons why businesses want to quickly reach a product-market fit:

• PMF is a key milestone that indicates a business is ready to rapidly scale.
• PMF helps acquire customers at a low cost thanks to organic growth.
• PMF reduces the uncertainty of entering or expanding to new markets.
• PMF provides a clear direction for future product versions and improvements.
• PMF is a good indicator to investors that the business is a good investment choice.
• PMF reveals a strong alignment between the product and the market.

These are far from the only benefits of achieving product-market fit. For example, knowing which markets your product succeeds in will provide plenty of data to help you create campaigns targeting lookalike audiences.

Examples of product-market fit

There are many famous recent examples of companies that found a product-market fit.

Airbnb

Airbnb struck gold by solving what used to be a huge problem for travelers.

Specifically, the demand for affordable and unique accommodations that could serve as an alternative to hostels and traditional hotels.

Airbnb matched this demand with homeowner interest to rent out unused spaces.

Netflix

It’s hard to imagine considering how synonymous Netflix and streaming seem to be, but Netflix famously started out as a DVD rental service.

While they were engaged in a sales war with Blockbuster, Netflix recognized the growing hunger for on-demand entertainment and convenient online access.

Netflix swiftly pivoted and tapped into a huge global market, leading to exponential growth.

Zoom

Zoom’s astronomic growth during the pandemic is a perfect example of when global demand surges to create a product-market fit (before eventually waning).

Although Zoom existed before 2020, the company achieved an undeniable PMF when businesses, schools, and families needed a reliable tool for video communication. Its stability and ease of use resonated with the global audience, helping it quickly achieve dominance during the pandemic.

Slack

Slack was originally developed as an internal communication tool for a different product. But once the founders saw there was an appetite for better team communication software, they shifted their focus and doubled down on Slack.

Nowadays, Slack is a go-to solution for powering team communication.

Challenges in achieving product-market fit

There are many spots where you might stumble as you pursue a product-market fit:

• Understanding customer needs if customer feedback is vague or inconsistent
• Accurately identifying customer pain points, preferences, and solutions
• Judging the market to determine if there’s enough demand for your product
• Continuously adjusting the product if there’s little time and funding
• Developing the product if you don’t have the talent to build it
• Outperforming the competition if you’re up against big companies

In addition to these challenges, there are a few pitfalls that you might encounter as you try to achieve PMF.

The first trap is listening to everyone. While it’s good to start founder outreach as quickly as possible, collecting tons of information, data, and opinions along the way, it’s impossible to make everyone happy. For example, companies that provide freemium services should conserve resources by focusing on paying users, not free.

Another trap is thinking of PMF as a goal, not a process. Like we mentioned earlier, PMF is a major milestone in the life of a business. And if you can achieve it, you can also lose it. 

How to measure product-market fit

There’s no clear-cut way to measure product-market fit, but there are some performance metrics you can track to assess if you’re moving in the right direction.

• Customer retention rate – High retention indicates that customers find value in your product and they keep using it. When customers churn quickly, it’s a sign that your product doesn’t fit their needs.
• Low churn rate – When churn is low, customers are sticking around and using your product.
• Repeat purchase rate – Do users renew their subscriptions or purchase additional features? If they do, it suggests that not only do customers get value, but they want to retain it.
• Sales growth – Rapid and consistent revenue growth signals strong demand, indicating there’s a PMF.
• Lifetime Value to Customer Acquisition Cost – If your LTV is higher than your CAC, it shows you’re acquiring the right customers and that you’re bringing in more than you’re spending.
• User engagement – High engagement implies that users see value and want to rely on your product to solve their problems.

How to achieve product-market fit

Product-market fit looks different from business to business.

On the one hand, this means there are several ways to reach PMF. But on the other hand, there’s no 100% replicable path to PMF.

However, these six steps will make it easier to find your product-market fit.

Determine your target customer

Your first step is to figure out who your ideal customers are, as well as create buyer personas that model the people who will ultimately make the decision to purchase.

If you’re not sure where to begin, market research will help you pinpoint initial potential customers and users, which can inform your different sales personas.

Identify an underserved customer need

It’s extremely challenging to sell a product in a market full of solutions that people are happy with.

That’s why you’ll want to find something people are unhappy with. 

Identifying a specific problem your product can solve is critical in matching your product with a market.

This will require researching your target customers, their pains, and their needs. You’ll also have to run surveys and interviews to collect data and insights.

Determine your value proposition

Your value proposition is your solution to a customer’s needs. It should explain what users should expect from using your product.

Here are a few examples:

• Netflix – Personalized, on-demand entertainment
• Apple – Innovative premium design
• Slack – Greater work productivity with less effort
• AiSDR – More meetings booked each month

Figure out your Minimum Viable Product features

Your Minimum Viable Product (MVP) is the version of your product that has the absolute minimum number of features to attract early users. It transforms your abstract value into tangible features.

You can think of it as a proof of concept or a way to validate your product hypothesis.

In the end, your MVP needs to have enough features to address the customer need you’re targeting.

Create your MVP prototype

Once you’ve decided on the features you’d like to include, you’ll need a prototype.

Depending on how fast you want results, you can proceed with a simple wireframe mockup or you can build a simplified version of your software.

Test your MVP with customers

With your prototype in hand, it’s time to get it in the hands of your target customers and users.

You’ll need to do several things simultaneously:

• Ask questions
• Listen to their feedback as they use
• Check if users understand what the product does
• Verify if your product solves their problems
• Monitor data usage (if you have a software prototype)

If there’s no “click” or “Aha!” moment, you might need to return to Step 2 and start again.